LOCAL GOVERNMENTS’ RIGHTS TO CHARGE TAXES ON THE GROSS SALES OF BUSINESSES BASED ON THEIR LOCALITIES

Dante Gatmaytan

October 2005

DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

Abstract
This study looks into the power local governments (LGUs) to impose a tax on “gross sales” on businesses within their territorial jurisdictions. It presents the legal framework or local government taxation, summarizes the salient points of Supreme Court decisions that serve as the legal basis to the claim of LGUS that they can impose local taxes on businesses, presents the issues surrounding the rulings as well as the Bureau of Internal Revenue rulings on these issues, and explains the merits of each position presented by concerned groups. There being no prohibition in the Local Government Code against the imposition of taxes on ‘”gross sales” it is submitted that local governments have the power to impose said taxes.

Local Governments’ Rights to Charge Taxes on the Gross Sales of Businesses Based on their Localities

Dante B. Gatmaytan* I. Introduction A study on the severe contraction of tax effort in the Philippines show that collections for all major tax groups fell relative to GDP in 1997-2001. This drop included collections from value-added taxes (VAT).1 The drop in tax revenues remains a puzzle to analysts although it has been suggested that VAT evasion may arise from two sources: (1) the underdeclaration of sales; and/or (2) the overdeclaration of claims for input VAT. The Bureau of Internal Revenue launched a program to flush out firms which underdeclare their sales. Prospectively, the Bureau could also minimize the leakage from the overdeclaration of claims for input VAT through the use of industry benchmarking. It is notable that some 45 percent of the large VAT payers were found to have exceeded their respective industry benchmark (for the ratio of the value of VAT-able inputs to value of VAT-able output) by more than 50 percent.2 Things are not faring all that well in the local government level either. It has been observed that while the Local Government Code3 authorizes local governments to levy a good

Assistant Professor, University of the Philippines, College of Law, Lecturer; Philippine Judicial Academy, Supreme Court of the Philippines; Lecturer, Ateneo de Manila University, Department of Political Science. LL.B., University of the Philippines, 1991; M.S.E.L., Vermont Law School, 1995; LL.M., University of California, Los Angeles, 1996. The views expressed here are the author’s and do not reflect the views of the institutions he is affiliated with. The author wishes to thank Pia Rieza for providing excellent research assistance. 1 Rosario G. Manasan, Explaining the Decline in Tax Effort, Philippine Institute of Development Studies Policy Notes, December 2002, pp. 1-2. 2 Id. at 6. 3 Rep. Act No. 7160 (1990).

*

number of taxes, the central government retained the more revenue productive taxes. 4 Particularly, it was noted that the tax structure prescribed by the Code for local business tax should be simplified to ease tax administration and to improve taxpayer compliance. There is also a critical need for greater computerization and capacity building for the staff of the tax division.5 There is, contrary to legislative design, a greater local government dependence on the national government for financial assistance, primarily due to the internal revenue transfers from the latter.6 Evidently, both the national and local governments are falling behind in terms of exploiting the legal avenues for income generation. With this backdrop, this study will look into the power of local governments to impose a tax on “gross sales” on businesses within their territorial jurisdictions. In the end, it is hoped that this study can: 1. Present the legal framework for local government taxation including the innovations inscribed into the 1987 Constitution and the main features of the Local Government Code of 1991. 2. Summarize the salient points of the Supreme Court decisions that serve as the legal basis to the claim of local government units that they can impose local taxes on businesses in their jurisdictions. 3. Present the issues surrounding the rulings. Explain the matters of concern by all sides affected by the said rulings (e.g. local government units, businesses, etc.)
4

Rosario G. Manasan, Local Public Finance in the Philippines: In Search of Autonomy with Accountability, Philippine Institute of Development Studies Discussion Paper Series No. 2004-42. 5 Id. 6 See generally, Dante B. Gatmaytan, Cost and Effect: The Impact and Irony of the Internal Revenue Allotment, 75 PHIL. L.J. 630-679 (2000).

4. 5.

Present rulings of the Bureau of Internal Revenue on these issues, and Explain the merits of each position presented by the concerned groups.

II. The Law A. The Constitution Written largely in response to the restrictive and centralist policies of the Marcos administration, the framers of the 1987 Constitution of the Philippines strengthened local government autonomy, and in particular, the financial autonomy of these political subdivisions. The power of local government units’ power to tax is now inscribed in Article X, section 5 of the Constitution, which reads: SECTION 5. Each Local Government unit shall have the power to create its own sources of revenue and to levy taxes, fees and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the Local Governments. This is a significant development because no previous Constitution of the Philippines contained such an express recognition of the local governments’ power to tax. Indeed, the power was merely delegated to local governments; the latter had no inherent power to tax. As such, it could be withdrawn by Congress if it so wished.7 Under this provision, Congress can only provide the guidelines and limitations on the power to tax, and even then, such guidelines must be consistent with the policy on local
7

Basco v. Philippine Amusements and Gaming Corporation, G.R. No. 91649 May 14, 1991.

autonomy. The power to tax is primarily vested in Congress. This power may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by the Constitution. The effect of Article X, section 5 of the Constitution is that in interpreting statutory provisions on municipal fiscal powers, doubts will have to be resolved in favor of municipal corporations.”8 The Constitution contains two other significant provisions of the Constitution that pertain to local government finances: Section 6. Local government units shall have a just share, as determined by law, in the national taxes which shall be automatically released to them. Section 7. Local governments shall be entitled to an equitable share in the proceeds of the utilization and development of the national wealth within their respective areas, in the manner provided by law, including sharing the same with the inhabitants by way of direct benefits. Thus, aside from the power to tax, the Constitution mandates that local governments receive a share of the internal revenue of the local government as well as a share in the proceeds resulting from the exploitation of resources within their territories. These provisions are significant because they attempt to provide local governments with the financial resources necessary to carry out their mandates under the present law. They are enshrined in the Constitution to prevent Congress from depriving local governments of these means.

8

City Government of San Pablo v. Reyes, G.R. No. 127708, March 25, 1999.

B. The Local Government Code of 1991 Pursuant to the mandate of the Constitution, Congress enacted the Local Government Code of 1991. 9 Following the radical tenor of the fundamental law, Congress enacted a landmark in the history of decentralized government.10 It was hailed as the “most radical piece of legislation passed in the nation’s history”. 11 The principal author of the Code, Senator Aquilino Pimentel Jr., called the law a “revolutionary” solution to the highly centralized character of Philippine government.12 The Code’s most prominent feature is the devolution of substantial powers to local government units “to bring development to the countryside.”13 The Code attempts to remedy the highly centralized nature of Philippine government, and weans local governments from dependence on the national leadership.14 It seeks to abolish this system of patronage between the national and local governments by allowing the latter to develop “at their own pace, with their own resources and at their own discretion.”15 Congress attempted to attain this objective by, among others, increasing the financial resources available to local government units. The Code broadens the taxing powers of local governments, provides them with a specific share from the national wealth exploited in their

9

10

Rep. Act No. 7160 (1991). Alma Ocampo-Salvador, Philippine Local Governments: Toward Local Autonomy and Decemntralization, in POLITICS & GOVERNANCE: THEORY AND PRACTICE IN THE PHILIPPINE CONTEXT 117, 147 (1999). 11 Alex B. Brilantes, Jr., Issues and Trends in Local Governance in the Philippines, in THE LOCAL GOVERNMENT CODE: AN ASSESSMENT 3 (1999). 12 AQUILINO Q. PIMENTEL, Jr., THE LOCAL GOVERNMENT CODE OF 1991: THE KEY TO NATIONAL DEVELOPMENT 2 (1993). 13 Id. 14 Id. at 4. 15 Id.

areas, and increases their share from the national taxes—otherwise known as the Internal Revenue Allotment (IRA).16 These innovations have shaken the jurisprudence of local government taxation. The position of local governments against the national government has been strengthened. Congress reiterated these provisions are reiterated in the Local Government Code in section 18: SECTION 18. Power to Generate and Apply Resources. — Local government units shall have the power and authority to establish an organization that shall be responsible for the efficient and effective implementation of their development plans, program objectives and priorities; to create their own sources of revenues and to levy taxes, fees, and charges which shall accrue exclusively for their use and disposition and which shall be retained by them; to have a just share in national taxes which shall be automatically and directly released to them without need of any further action; to have an equitable share in the proceeds from the utilization and development of the national wealth and resources within their respective territorial jurisdictions including sharing the same with the inhabitants by way of direct benefits; to acquire, develop, lease, encumber, alienate, or otherwise dispose of real or personal property held by them in their proprietary capacity and to apply their resources and assets for productive, developmental, or welfare purposes, in the exercise or furtherance of their governmental or proprietary powers and functions and thereby ensure their development into self-reliant communities and active participants in the attainment of national goals.
16

Alex B. Brillantes, Local Governments in a Democratizing Polity, in DEMOCRATIZATION: PHILIPPINE PERSPECTIVES 83, 85 (Felipe B. Miranda ed., 1997).

Book II of the Local Government Code covers with local taxation and fiscal matters. It is divided into six titles that cover Local Government Taxation, Real Property Taxation, The Shares of Local Government Units in The Proceeds of National Taxes; Credit Financing; Local Fiscal Administration, and Property and Supply Management in the Local Government Units. Book II reiterates the power of local governments to generate revenue. Sec. 129. Power to Create Source of Revenue. — Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units. These powers, however, are not absolute. There are two provisions of the Code that provide the guidelines for the exercise of these powers: Sec. 130. Fundamental Principles. — The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units: a. Taxation shall be uniform in each local government unit; b. Taxes, fees, charges and other impositions shall: 1. be equitable and based as far as practicable on the taxpayer’s ability to pay; 2. be levied and collected only for public purposes; 3. not be adjust, excessive, oppressive, or confiscatory;

4. not be contrary to law, public policy, national economic policy, or in restraint of trade; c. The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person; d. The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and, e. Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

The other provides limitations on the power to tax: Sec. 133. Common Limitations on the Taxing Powers of Local Government Units. — Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and Barangays shall not extend to the levy of the following: a. b. c. Income tax, except when levied on banks and other financial institutions; Documentary stamp tax; Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein;

d.

Customs duties, registration fees vessels and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned;

e.

Taxes, fee and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise;

f.

Taxes, fees, or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;

g.

Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and (4) four years, respectively from the date of registration;

h.

Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products;

i.

Percentage or value added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;

j.

Taxes on the gross receipts of transaction contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

k. l.

Taxes on premium paid by way or reinsurance or retrocession; Taxes, fees or charges for the registration of motor vehicle and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles;

m.

Taxes, fees or charges on Philippine products actually exported, except as otherwise provided herein;

n.

Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the “Cooperatives Code of the Philippines” respectively; and

o.

Taxes, fees or charges, of any kind on the National Government, its agencies and instrumentalities, and local government units.

III. Case Law on the Power to Tax A. Common Limitations The Supreme Court has had ample opportunity to define the parameters of local government power to tax vis-à-vis the power of the national government to tax. The following discussion will cover the most important cases on this area of the law to date. First Philippine Industrial Corporation v. Court of Appeals,17 involved a business tax imposed by Batangas City to a pipeline concession. The original pipeline concession was
17

G.R. No. 125948, December 29, 1998.

granted in 1967 and renewed by the Energy Regulatory Board in 1992. Sometime in January 1995, First Philippine Industrial Corporation applied for a mayor’s permit with the Office of the Mayor of Batangas City. However, the City Treasurer required FPIC to pay a local tax based on its gross receipts for the fiscal year 1993 pursuant to the Local Government Code. The Treasurer assessed a business tax on the petitioner

amounting to P956,076.04 payable in four installments based on the gross receipts for products pumped at GPS-1 for the fiscal year 1993 which amounted to P181,681,151.00. In order not to hamper its operations, petitioner paid the tax under protest. Subsequently, FPIC filed a protest addressed to the Treasurer an exemption from business taxes imposed by the city: Please note that our Company (FPIC) is a pipeline operator with a government concession granted under the Petroleum Act. It is engaged in the business of transporting petroleum products from the Batangas refineries, via pipeline, to Sucat and JTF Pandacan Terminals. As such, our Company is exempt from paying tax on gross receipts under Section 133 of the Local Government Code of 1991…. Moreover, Transportation contractors are not included in the enumeration of contractors under Section 131, Paragraph (h) of the Local Government Code. Therefore, the authority to impose tax ‘on contractors and other independent contractors’ under Section 143, Paragraph (e) of the Local Government Code does not include the power to levy on transportation contractors. The imposition and assessment cannot be categorized as a mere fee authorized

under Section 147 of the Local Government Code. The said section limits the imposition of fees and charges on business to such amounts as may be commensurate to the cost of regulation, inspection, and licensing. Hence,

assuming arguendo that FPIC is liable for the license fee, the imposition thereof based on gross receipts is violative of the aforecited provision. The amount of P956,076.04 (P239,019.01 per quarter) is not commensurate to the cost of regulation, inspection and licensing. The fee is already a revenue raising

measure, and not a mere regulatory imposition. The Treasurer denied the protest saying that petitioner cannot be considered engaged in transportation business, thus it cannot claim exemption under Section 133 (j) of the Local Government Code. FPIC filed with the Regional Trial Court of Batangas City a complaint for tax refund alleging primarily that the imposition and collection of the business tax on its gross receipts violates Section 133 of the Local Government Code. The City argued that FPIC cannot be exempt from taxes under Section 133 (j) of the Local Government Code because the exemption applied only to “transportation contractors and persons engaged in the transportation by hire and common carriers by air, land and water.” It claimed that pipelines are not included in the term “common carrier” which refers solely to ordinary carriers such as trucks, trains, ships and the like. The City added that the term “common carrier” pertains to the manner by which a product is delivered to its destination. The trial court rendered a decision dismissing the complaint, adhering to the position taken by the City. The Court of Appeals affirmed the dismissal. The Supreme Court reversed the Court of Appeals.

The Court explained that a “common carrier” may be defined, broadly, as one who holds himself out to the public as engaged in the business of transporting persons or property from place to place, for compensation, offering his services to the public generally. Article 1732 of the Civil Code defines a “common carrier” as “any person, corporation, firm or association engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public.” The test for determining whether a party is a common carrier of goods is: 1. He must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods for person generally as a business and not as a casual occupation; 2. He must undertake to carry goods of the kind to which his business is confined; 3. He must undertake to carry by the method by which his business is conducted and over his established roads; and 4. The transportation must be for hire.

The Court held that based on the above definitions and requirements there is no doubt that FPIC is a common carrier. It is engaged in the business of transporting or carrying goods (petroleum products) for hire as a public employment. It undertakes to carry for all persons who choose to employ its services, and transports the goods by land and for compensation. The fact that it has a limited clientele does not exclude it from the definition of a common carrier.

The City’s argument that the term “common carrier” as used in Section 133 (j) of the Local Government Code refers only to common carriers transporting goods and passengers through moving vehicles or vessels either by land, sea or water, is erroneous. The definition of “common carriers” in the Civil Code makes no distinction as to the means of transporting, as long as it is by land, water or air. It does not provide that the transportation of the passengers or goods should be by motor vehicle. Under the Petroleum Act of the Philippines (Republic Act No. 387), FPIC is considered a “common carrier.” Thus, Article 86 thereof provides that: Art. 86. Pipe line concessionaire as a common carrier. — A pipe line shall have the preferential right to utilize installations for the transportation of petroleum owned by him, but is obligated to utilize the remaining transportation capacity pro rata for the transportation of such other petroleum as may be offered by others for transport, and to charge without discrimination such rates as may have been approved by the Secretary of Agriculture and Natural Resources. Republic Act 387 also regards petroleum operation as a public utility. Pertinent portion of Article 7 thereof provides: that everything relating to the exploration for and exploitation of petroleum x x and everything relating to the manufacture, refining, storage, or transportation by special methods of petroleum, is hereby declared to be a public utility. The Bureau of Internal Revenue likewise considers FPIC as a “common carrier.” In BIR Ruling No. 069-83, it declared: …since [petitioner] is a pipeline concessionaire that is engaged only in

transporting petroleum products, it is considered a common carrier under Republic Act No. 387….. Such being the case, it is not subject to withholding tax prescribed by Revenue Regulations No. 13-78, as amended. The Court held that there is no doubt that FPIC is a “common carrier” and, therefore, exempt from the business tax as provided for in Section 133 (j) of the Local Government Code. The Court also studied the deliberations conducted in the House of Representatives on the Local Government Code18 and found that Congress sought to exclude from the taxing power of the local government unit the imposition of business tax against common carriers is to prevent a duplication of the so-called “common carrier’s tax.” The Court concluded that since FPIC is already paying three percent common carrier’s tax on its gross sales/earnings under the National Internal Revenue Code. To tax FPIC again on its gross receipts in its transportation of petroleum business would defeat the purpose of the Local Government Code.

The records revealed the following exchange: MR. AQUINO (A). Thank you, Mr. Speaker. Mr. Speaker, we would like to proceed to page 95, line 1. It states : “SEC.121 [now Sec. 131]. Common Limitations on the Taxing Powers of Local Government Units.” x x x MR. AQUINO (A.). Thank you Mr. Speaker. Still on page 95, subparagraph 5, on taxes on the business of transportation. This appears to be one of those being deemed to be exempted from the taxing powers of the local government units. May we know the reason why the transportation business is being excluded from the taxing powers of the local government units? MR. JAVIER (E.). Mr. Speaker, there is an exception contained in Section 121 (now Sec. 131), line 16, paragraph 5. It states that local government units may not impose taxes on the business of transportation, except as otherwise provided in this code. Now, Mr. Speaker, if the Gentleman would care to go to page 98 of Book II, one can see there that provinces have the power to impose a tax on business enjoying a franchise at the rate of not more than one-half of 1 percent of the gross annual receipts. So, transportation contractors who are enjoying a franchise would be subject to tax by the province. That is the exception, Mr. Speaker. What we want to guard against here, Mr. Speaker, is the imposition of taxes by local government units on the carrier business. Local government units may impose taxes on top of what is already being imposed by the National Internal Revenue Code which is the so-called “common carriers tax.” We do not want a duplication of this tax, so we just provided for an exception under Section 125 [now Sec. 137] that a province may impose this tax at a specific rate. MR. AQUINO (A.). Thank you for that clarification, Mr. Speaker….

18

It should be clear that the Supreme Court did not strike down the tax on the ground that it constituted double taxation. FPIC could not have been levied a business tax because it was exempted from such—as clearly intended by Congress—under Section 133 of the Code. Clearly, the case pertains to a specific prohibition that was enacted into law. Where, therefore, there is a clear prohibition on the part of the local government to tax a certain activity, the local government will have no choice but to refrain from doing so. This was again illustrated in the case of Palma Development Corporation v. Municipality of Malangas.19 Palma Development Corporation is engaged in milling and selling rice and corn to wholesalers in Zamboanga City. It uses the municipal port of Malangas, Zamboanga del Sur as transshipment point for its goods. The port, as well as the surrounding roads leading to it, belong to and are maintained by the Municipality of Malangas, Zamboanga del Sur. The municipality passed Municipal Revenue Code No. 09, Series of 1993. Section 5G.01 of the ordinance in part reads: Section 5G.01. Imposition of fees. There shall be collected service fee for its use of the municipal road[s] or streets leading to the wharf and to any point along the shorelines within the jurisdiction of the municipality and for police surveillance on all goods and all equipment harbored or sheltered in the premises of the wharf and other within the jurisdiction of this municipality… Palma paid the service fees imposed by the ordinance under protest and then sought relief from the Regional Trial Court of Pagadian City. Palma contended that under the Local

19

G.R. No. 152492, October 16, 2003.

Government Code of 1991, municipal governments did not have the authority to tax goods and vehicles that passed through their jurisdictions. The Court rendered a Decision declaring the entire Municipal Revenue Code as ultra vires and void. The case reached the Supreme Court where Palma argued that the municipality may tax vehicles using its roads it cannot tax the goods that are transported by the vehicles. The provision of the ordinance imposing a service fee for police surveillance on goods, they argued, is contrary to Section 133(e) of the Local Government Code: Section 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following… e) Taxes, fees and charges and other impositions upon goods carried into and out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise… The municipality maintained that the fees are intended for the use of municipal roads and police surveillance. The fees are supposedly not covered by the prohibited impositions under Section 133(e) of RA No. 7160. It argued that it was empowered to enact the measure under Sections 153 and 155 of the Local Government Code.20

20

The pertinent provisions of this statute read as follows: Section 153. Service Fees and Charges. — Local government units may impose and collect

The Supreme Court sided with Palma saying that by express language of Sections 153 and 155, local government units may prescribe the terms and conditions for the imposition of toll fees or charges for the use of any public road, pier or wharf funded and constructed by them. A service fee imposed on vehicles using municipal roads leading to the wharf is thus valid. However, Section 133(e) prohibits the imposition, in the guise of wharfage, of fees — as well as all other taxes or charges in any form whatsoever — on goods or merchandise. It is therefore irrelevant if the fees imposed are actually for police surveillance on the goods, because any other form of imposition on goods passing through the territorial jurisdiction of the municipality is clearly prohibited by Section 133(e). The Court explained that the ordinance imposed wharfage — “a fee assessed against the cargo of a vessel engaged in foreign or domestic trade based on quantity, weight, or measure received and/or discharged by vessel.” Wharfage does not lose its basic character by being labeled as a service fee “for police surveillance on all goods.” In one case, however, the claim for an exemption under section 133 did not succeed. In Batangas Power Corporation v. Batangas City and National Power Corporation
21

the

Batangas Power Corporation (BPC) refused to pay business taxes on the strength of a tax holiday clause in section 133 (g) of the Code. The Supreme Court, however, disagreed and

held that Sec. 133 (g) applies specifically to taxes imposed by the local government, like the
such reasonable fees and charges for services rendered…. Section 155. Toll Fees or Charges. -- The sanggunian concerned may prescribe the terms and conditions and fix the rates for the imposition of toll fees or charges for the use of any public road, pier or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the local government unit concerned: Provided, That no such toll fees or charges shall be collected from officers and enlisted men of the Armed Forces of the Philippines and members of the Philippine National Police on mission, post office personnel delivering mail, physically-handicapped, and disabled citizens who are sixty-five (65) years or older. When public safety and welfare so requires, the sanggunian concerned may discontinue the collection of the tolls, and thereafter the said facility shall be free and open for public use. 21 Batangas Power Corporation v. Batangas City and National Power Corporation, G.R. No. 152675, April 28, 2004.

business tax imposed by Batangas City on BPC. Reliance of BPC on Executive Order No. 226, specifically Section 1, Article 39, Title III, is misplaced as the six-year tax holiday provided therein which commences from the date of commercial operation refers to income taxes imposed by the national government on BOI-registered pioneer firms. Clearly, it is the provision of the Local Government Code that should apply to the tax claim of Batangas City against the BPC. The six-year tax exemption of BPC should thus commence from the date of BPC’s registration with the BOI on July 16, 1993 and end on July 15, 1999.

B. Taxes that may be Imposed by the National Government The preceding three cases involved an imposition of a tax by a local government unit against an entity that claimed an exemption under Section 133 of the Code. The situation becomes complicated, however, when a similar tax is likewise imposed by the national government. The case that illustrates this problem best is Province of Bulacan v. Court of Appeals.22 The Sangguniang Panlalawigan of Bulacan passed Provincial Ordinance No. 3, known as “An Ordinance Enacting the Revenue Code of the Bulacan Province.” That Ordinance in part provided: Section 21. Imposition of Tax. There is hereby levied and collected a tax of 10% of the fair market value in the locality per cubic meter of ordinary stones, sand, gravel, earth and other quarry resources, such, but not limited to marble, granite, volcanic cinders, basalt, tuff and rock phosphate, extracted from public

22

G.R. No. 126232, November 27, 1998.

lands or from beds of seas, lakes, rivers, streams, creeks and other public waters within its territorial jurisdiction. The Provincial Treasurer assessed Republic Cement Corporation (RCC) some two and a half million pesos for extracting limestone, shale and silica from several parcels of private land in the province during the third quarter of 1992 until the second quarter of 1993. RCC filed a petition for declaratory relief with the Regional Trial Court of Bulacan questioning the authority of the province to levy said tax. The issue eventually reached the Supreme Court which held that the assessment against RCC was void. The pertinent provisions of the Local Government Code are as follows: Sec. 134. Scope of Taxing Powers. — Except as otherwise provided in this Code, the province may levy only the taxes, fees, and charges as provided in this Article. Sec. 138. Tax on Sand, Gravel and Other Quarry Resources. — The province may levy and collect not more than ten percent (10%) of fair market value in the locality per cubic meter of ordinary stones, sand, gravel, earth, and other quarry resources, as defined under the National Internal Revenue Code, as amended, extracted from public lands or from the beds of seas, lakes, rivers, streams, creeks, and other public waters within its territorial jurisdiction…. The Supreme Court held that as pointed out by Bulacan, Section 186 allows a province to levy taxes other than those specifically enumerated under the Code, subject to the conditions specified therein. Nevertheless, Bulacan still cannot impose taxes on stones, sand, gravel, earth and other quarry resources extracted from private lands. The tax imposed by the

Province of Bulacan is an excise tax, being a tax upon the performance, carrying on, or exercise of an activity. Thus, section 133 (h) of the Code becomes relevant: Section 133. — Common Limitations on the Taxing Powers of Local Government Units. - Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following…. (h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products… A province may not, therefore, levy excise taxes on articles already taxed by the National Internal Revenue Code. Unfortunately for Bulacan, the National Internal Revenue Code provides the following: Section 151. — Mineral Products. — (A) Rates of Tax. — There shall be levied, assessed and collected on

minerals, mineral products and quarry resources, excise tax as follows…. (2) On all nonmetallic minerals and quarry resources, a tax of two percent (2%) based on the actual market value of the gross output thereof at the time of removal, in case of those locally extracted or produced; or the values used by the Bureau of Customs in determining tariff and customs duties, net of excise tax and value-added tax, in the case of importation…. (B) [Definition of Terms]. — For purposes of this Section, the term…

(4) Quarry resources shall mean any common stone or other common mineral substances as the Director of the Bureau of Mines and Geo-Sciences may declare to be quarry resources such as, but not restricted to, marl, marble, granite, volcanic cinders, basalt, tuff and rock phosphate; Provided, That they contain no metal or metals or other valuable minerals in economically workable quantities. It is clear that the National Internal Revenue Code levies a tax on all quarry resources, regardless of origin, whether extracted from public or private land. Thus, a province may not ordinarily impose taxes on stones, sand, gravel, earth and other quarry resources, as the same are already taxed under the National Internal Revenue Code. The province can, however, impose a tax on stones, sand, gravel, earth and other quarry resources extracted from public land because it is expressly empowered to do so under the Local Government Code. But it may not do so tax resources extracted from private land because of the limitation provided by Section 133 of the Code in relation to Section 151 of the National Internal Revenue Code. Given the above disquisition, petitioners cannot claim that the appellate court unjustly deprived them of the power to create their sources of revenue, their assessment of taxes against Republic Cement being ultra vires, traversing as it does the limitations set by the Local Government Code. The implication of the case is that when an excise tax is already covered imposed by the national government, the local government may no longer impose the same tax. Unless the Local Government Code itself authorizes local governments to impose the same tax.

While section 133 is limited to excise taxes, the Bulacan case also draws our attention to section 186 of the Code which provides that: SECTION 186. Power To Levy Other Taxes, Fees or Charges. — Local

government units may exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose. This provision allows local government units to tax on any “base or subject” not taxed under the National Internal Revenue Code. As I will explain later, this provision may be the antidote to double taxation.

IV. Double Taxation A. High Standards for Double Taxation In the Philippines, there can be no real objection to a simultaneous taxation by the national and local governments. amount to double taxation. The Supreme Court has repeatedly emphasized that: Double taxation means taxing the same property twice when it should be taxed only once; that is, “…taxing the same person twice by the same jurisdiction for This practice, although evidently burdensome does not

the same thing.” It is obnoxious when the taxpayer is taxed twice, when it should be but once. Otherwise described as “direct duplicate taxation,” the two taxes must be imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character. Such a narrow definition of double taxation virtually prevents any tax to qualify as “double taxation.” There can never be double taxation when the taxes are imposed by the national government on one hand, and a local government on the other. For example, a tax on “gross sales” by both the national and local governments cannot amount to “double taxation” because they are imposed by different taxing authorities. Indeed, the Supreme Court in Commissioner of Internal Revenue v. Solidbank Corporation, 23 illustrated how difficult it is to identify double taxation. In that case the Court held that a tax has different subject matters if one covers the passive income generated in the form of interest on deposits and the other covers the privilege of engaging in the business of banking. Similarly, a tax based on receipts is a tax on business rather than on the property; hence, it is an excise rather than a property tax. Taxes may be imposed by the same taxing authority – the national government under the National Internal Revenue Code – but still be valid because the taxing periods they affect are different. A tax deducted and withheld as soon as the income is earned, and is paid after every calendar quarter in which it is earned is different from one paid only after every taxable quarter in which it is earned.
23

G.R. No. 148191, 25 November 2003, 416 SCRA 436.

Taxes are of different kinds or characters when one is an income tax subject to withholding, while another is a percentage tax not subject to withholding. In another case, the Court held that there is no double taxation when Section 121 of the Tax Code imposes a gross receipts tax on interest income that is already subjected to the 20% final withholding tax under Section 27 of the Tax Code. The former is a business tax under Title V of the Tax Code, while the final withholding tax is an income tax under Title II of the Code. In this case, the law imposes two different taxes on the same income, business and property. It proceeded to explain that there is no constitutional prohibition on subjecting the same income to an income tax and to a gross receipts tax. Similarly, the same income or receipt may be subject to the value-added tax and the excise tax like the specific tax. If the tax law follows the rule on uniformity, making all income, business or property of the same class taxable at the same rate, there can be no valid objection to taxing the same income, business or property twice.24 B. No Constitutional Prohibition More importantly, there is no constitutional prohibition against double taxation.25 This has been reiterated by the Supreme Court for decades. For instance, the case of City of Baguio v. De Leon,26 involved an ordinance of the City of Baguio imposing a license fee on any person, firm, entity or corporation doing business in the Baguio City. The ordinance was challenged as defective because it was enacted without sufficient legal basis and that it amounted to double taxation. The dispute reached the Supreme Court, which then decided in
24 25

China Banking Corporation v. Court of Appeals, G.R. No. 146749, June 10, 2003. China Banking Corporation v. Court of Appeals, G.R. No. 146749, June 10, 2003. 26 G.R. No. L-24756, October 31, 1968.

favor of the City: To repeat, the challenged ordinance cannot be considered ultra vires as there is more than ample statutory authority for the enactment thereof. Nonetheless, its validity on constitutional grounds is challenged because the allegation that it imposed double taxation, which is repugnant to the due process clause, and that it violated the requirement of uniformity. We do not view the matter thus. As to why double taxation is not violative of due process, Justice Holmes made clear in this language: “The objection to the taxation as double may be laid down on one side . . . . The 14th Amendment [the due process clause] no more forbids double taxation than it does doubling the amount of a tax, short of confiscation or proceedings unconstitutional on other grounds.” With that

decision rendered at a time when American sovereignty in the Philippines was recognized, it possesses more than just a persuasive effect. To some, it

delivered the coup de grace to the bogey of double taxation as a constitutional bar to the exercise of the taxing power. It would seem though that in the United States, as with us, its ghost, as noted by an eminent critic, still stalks the juridical stage. In a 1947 decision, however, we quoted with approval this excerpt from a leading American decision: “Where, as here, Congress has clearly expressed its intention, the statute must be sustained even though double taxation results.” At any rate, it has been expressly affirmed by us that such an “argument against double taxation may not be invoked where one tax is imposed by the state and the other is imposed by the city… it being widely recognized that there is

nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the state and the political subdivisions thereof.” In Villanueva v. City of Iloilo,27 the Court upheld another ordinance against a similar challenge. The ordinance in that case imposed a tax on “any building or dwelling for renting space divided into separate apartments or accessories.” The tax was challenged because, it was alleged, that it added a tenement tax on top of the real estate taxes that the residents were already paying. But the Court upheld the ordinance: It is a well-settled rule that a license tax may be levied upon a business or occupation although the land or property used in connection therewith is subject to property tax. The State may collect an ad valorem tax on property used in a calling, and at the same time impose a license tax on that calling, the imposition of the latter kind of tax being in no sense a double tax. “In order to constitute double taxation in the objectionable or prohibited sense the same property must be taxed twice when it should be taxed but once; both taxes must be imposed on the same property or subject-matter, for the same purpose, by the same State, Government, or taxing authority, within the same jurisdiction or taxing district, during the same taxing period, and they must be the same kind or character of tax.” It has been shown that a real estate tax and the tenement tax imposed by the ordinance, although imposed by the same taxing authority, are not of the same kind or character.

27

G.R. No. L-26521, December 28, 1968.

At all events, there is no constitutional prohibition against double taxation in the Philippines. It is something not favored, but is permissible, provided some other constitutional requirement is not thereby violated, such as the requirement that taxes must be uniform. The Philippines did not adopt the injunction against double taxation found in the Constitution of the United States and of some States of the Union. Then, again, the general principle against delegation of legislative powers, in consequence of the theory of separation of powers is subject to one well-established exception, namely: legislative powers may be delegated to local governments — to which said theory does not apply— in respect of matters of local concern.28

V. Bureau of Internal Revenue Rulings The Bureau of Internal Revenue’s rulings have been consistent with the Supreme Court’s decisions and in fact cite some of the cases that were discussed here. Thus, the BIR upheld the simultaneous taxes imposed by the national government (on liquor) and the local government (on beer). The BIR ruled: You cannot invoke double taxation in this case because the impositions of said taxes are made by two different taxing authorities — one by the National Government and the other by the City Government. It has been held that double taxation may not be invoked where a tax is imposed by the national government and another by the city for the exercise of the same occupation or business as

28

Pepsi-Cola Bottling Co. of the Philippines, Inc. v. City of Butuan, G.R. No. L-22814, August 28, 1968.

the tax is not imposed by the same public authority. (Punzalan vs. Municipality Board of Manila, 95 Phil. 46; Pepsi Cola Bottling Co. vs. Mun. of Tanauan, L31156, Feb. 27, 1976; City of Baguio vs. De Leon, L-24756, Oct. 31, 1968) Furthermore, even assuming that double taxation would thereby materialize, there is no prohibition against the same in this jurisdiction. (CIR vs. Hawaiian Phil. Co., 11 SCRA 256; Manufacturer's Life Ins. Co. vs. Meer, 89 Phil. 357; City of Manila vs. Inter-Islands Gas Services Inc., 99 Phil. 847).29 The BIR also upheld a local government order imposing an amusement tax on top of the value-added tax collected by the national government on the ground that it does not constitute double taxation. In that ruling, the BIR explained that: In its strict sense, “double taxation” means taxing twice, by the same public authority, within the same taxing district, for the same purpose, in the same year or taxing period, the same subject matter. It is also defined as the requirement that one person or any one subject of taxation shall directly contribute twice to the same burden, while other subjects of taxation belonging to the same class are required to contribute but once. (Cooley, Tax. 394, citing McNeil vs. Hagenty, 51 Ohio St., 244, 37 N.E., 526, 23 L.R.A. 268) In Punzalan vs. Municipal Board of Manila, L-4817, May 26, 1954, the issue is whether or not double taxation arises when one tax is imposed by the State and the other is imposed by the City. The Supreme Court, in deciding the case, observed that the argument against double taxation may not be invoked where one tax is imposed by the State and the other by the City, it being widely
29

BIR Ruling No. 072-90.

recognized that there is nothing inherently obnoxious in the requirement that license fees or taxes be exacted with respect to the same occupation, calling or activity by both the State and the political subdivision thereof.30 These rulings are inevitable considering the fact that it is the Judiciary that has the power to interpret the law. When the executive branch interprets the law, it too should abide by the interpretation of the courts. For although it may be true that the contemporaneous construction of a statute by executive officers tasked to enforce and implement said statute should be given great weight by the courts,31 nevertheless, if such construction is erroneous or is clearly shown to be in conflict with the governing statute or the Constitution or other laws, the same must be declared null and void. “It is the role of the Judiciary to refine and, when necessary, correct constitutional or statutory interpretation, in the context of the interactions of the three branches of the government.”32 It is for this reason that the BIR is constrained to abide by the ruling of the Supreme Court.

VI. Comments The legal framework has been skewed heavily in favor of local governments. Section 133 of the Local Government Code sets the limits on the local governments’ power to tax but these are very few. On the other hand, the entire Book II of the Code contains an arsenal of tax powers at the disposal of local governments. With these vast powers, it is not unreasonable to suppose that local governments are given considerable leeway in taxation.
BIR Ruling [DA-306-00], August 15, 2000. The courts give much weight to contemporaneous construction because of the respect due the government agency or officials charged with the implementation of the law, their competence, expertness, experience and informed judgment, and the fact that they frequently are the drafters of the law they interpret. See Nestle Philippines Inc. v. Court of Appeals, 203 SCRA 504 (1991). 32 Philippine Scout Veterans Security & Investigation Agency, Inc. v. National Labor Relations Commission, G.R. No. 99859 September 20, 1996.
31 30

Section 186 furthermore suggests that unless something is already taxed by the national government under the National Internal Revenue Code, local governments have a free hand at taxing any other base or subject. The rule seems to be overwhelmingly in favor of allowing local governments to tax. There is still no Supreme Court ruling on the interpretation of section 186 but it is suggested here that it is not necessarily a ban on double taxation. As explained earlier, there is no rule against double taxation in this jurisdiction. Moreover, it does not seek to prevent a situation where there are “two taxes [are] imposed on the same subject matter, for the same purpose, by the same taxing authority, within the same jurisdiction, during the same taxing period; and they must be of the same kind or character.” On the contrary, it prevents a tax duplicated by two taxing authorities over the same base or subject matter. In a way, it provides the argument against a tax simultaneously by the national and local governments. Consistently with the thrust of the Local Government Code, section 186 should provide local governments with an expanded tax base and subject. It now allows local governments to tax beyond the express mandate of the Code. Business should welcome this interpretation because it provides ammunition against the duplication of taxes by two taxing authorities. In all the previous cases cited in this study, the Supreme Court upheld all the challenged ordinances on the ground that there can be no double taxation when the taxes are imposed by both the national and local governments simultaneously. The challenge to simultaneous taxes should not be made on the ground that they amount to double taxation, but that there is a violation of section 186.

In any case, since the Philippines adopted value-added tax in the National Internal Revenue Code,33 there is no legal impediment to the imposition of a sales tax by local governments. Under Philippine case law reviewed here, these are two different taxes imposed by two taxing authorities. Under the Local Government Code, however, local governments are not authorized to impose value-added tax on the same tax base.

VI. Conclusion The Constitution and the Local Government Code have very clearly strengthened the framework for local government finance. Under the Constitution alone, local governments have an increased tax base, a share in the national wealth within their territory, as well as share in internal revenue collections. The Local Government Code gives flesh to these mandates and altogether provides the groundwork for full fiscal autonomy of our local governments. The objections to a simultaneous imposition of a tax on “gross sales” by both the national and local governments should not be based on the principle of “double taxation.” That principle is not in force in the Philippines and can never apply when the taxes are imposed by different taxing authorities. There being no prohibition in the Code against the imposition of taxes on “gross sales” it is submitted that local governments have the power to impose said taxes.

33

See Republic Act No. 8424 (1997).